When someone involved in a startup passes away or becomes permanently disabled or incapacitated, the business can be drastically impacted. Whether or not they left a valid will or other business succession documents could be a critical factor for the business. So, how does a will impact a startup?
What happens if there’s a sole director?
If a sole director passes away, obviously no surviving directors are available to manage the company. Ideally, the director left a valid will appointing an individual (or people) who is authorised to manage the company immediately. However, without a will, the company is left without authorised people to manage the company.
Without an authorised party, the company might find it impossible to continue trading. With an authorised representative, banks and financial institutions can accept instructions related to the startup’s trading accounts, for example. This means staff and suppliers can be paid.
Having a valid will can also help ensure the business avoids serious cash flow problems. Note the authorised representative(s) nominated in the will is empowered to appoint someone like the director of a company. This can also help with continuity of the business, with the newly appointed director acting in the deceased’s sole director’s place.
The existence of a valid will could also positively impact things like selling the business for a company with only one director. For example, an authorised representative means someone who is eager to buy could finalise the transfer of ownership without waiting for the testator to settle the estate. Additionally, with a valid will and authorised representative, the company can be wound up more quickly if that’s what’s preferred. Without one, there could be a delay of months before beneficiaries can receive their benefits.
So complications can arise whenever someone dies without a valid will, but these complications are more serious if the person is the sole director of a company. The uncertainty is even greater if the sole director is also the sole shareholder of the company and this can take months to resolve.
What happens if a partner passes away?
As much as 95% of businesses might not have a legally enforceable partnership agreement or equivalent legal paperwork. A partnership agreement or similar legal document outlines what happens if one of the partners dies.
One of the numerous problems that can arise from this is the surviving partner not being able to borrow money or otherwise cover the costs of buying out the deceased’s share. This could affect the business’s day-to-day functions or even its survival. That’s why it is important to prepare yourself for a financial emergency to ensure that your startup runs smoothly, even in the event of a crisis.
Having the right insurance and a valid buy/sell agreement (also known as a business will) and/or a partnership agreement could help the startup avoid this dilemma. A buy/sell agreement means you and your partner (and your spouses where applicable) formally agree to how you’ll transfer your partnership shares if a partner dies or is permanently disabled.
So if the startup is a partnership, ideally you have a written partnership agreement or a buy/sell agreement. The agreement should include clauses that set out what happens if one of the partners passes away or is rendered permanently disabled.
This could include whether or not the deceased’s estate will take over the deceased partner’s share of the partnership. It could deal with the transfer of the other partner’s share to remaining partners on a payment to the estate. It could include provisions dealing with how you could opt to buy the deceased’s partner’s share.
If you don’t have a partnership agreement or buy/sell agreement, the Partnership Act in your state or territory will apply to outline what happens to your business in the event of a partner’s death. In most cases, this means the partnership will be dissolved upon the partner’s death.
The importance of a valid will
So having a valid will is critical for directors and stakeholders in a startup. 59% of Australians have a will, and this figure is probably lower than it should be. If you’re a director, partner, or otherwise responsible for a startup (or any business), make sure you have a valid will and keep it up to date.
And update every three to five years is a general rule of thumb, but as a business owner, director, or partner, you might have cause to update it more often, whenever your business circumstances change.
An estate planning lawyer can help you with the formalities. If you’re a sole shareholder or director of a startup, consider including a provision covering the beneficiaries of your shares in the business.
If you’re in a partnership, consider arranging a buy/sell agreement and make sure you update your partnership agreement if necessary. A valid will and a strategic estate plan taking the startup into account is the best way to ensure smooth transition and succession for the business.
Everyone should have a will and estate plan, but these are even more important for business owners, directors, and partners. An estate plan coupled with business documents like partnership agreements and buy/sell agreements help ensure both personal and business assets are treated as intended if someone in these roles passes away.